The Entrepreneurial Mind
LESSON 7: THE BUSINESS PLAN
What is a Business Plan
The business plan is a document that helps the small business owner determine what resources are needed to
achieve the objectives of the firm, and provides a standard against which to evaluate results.
Purposes of a Business Plan
A business plan is written for two main purposes. They are the following:
1. to serve as management's guide during the lifetime of the business; and
2. to fulfill the requirement for securing lenders and investors.
The Plan as a Guide
In the course of writing the business plan, the small business operator (SBO) is afforded sufficient time to
consider all factors relevant to operating the business. Through analyses of the environment and derivation of
what can be expected to happen, decisions about various aspects of business operations can be considered in
advance.
A Tool for Securing Funds
When the SBO needs initial or additional funding for his business venture, the business plan is a handy means
for convincing lenders and investors. In many cases, the business plan indicates that the proponent SBO is fully
aware of what he is getting into.
Revising the Plan
A business plan is prepared in consideration of the current and expected situations. In the process of
implementing the plan, however, the expected development or changes in the environment may not happen fully
or even partially.
Parts of the Business Plan
1. title page and contents;
2. executive summary;
3. description of the business;
4. description of the product or service;
5. market strategies;
6. analysis of the competition;
7. operations and management;
8. financial data; and
9. supporting documents.
Title Page and Contents
The business plan must be easily identifiable through a cover page with a listing of the following:
1. the name of the business;
2. the name/s of the proponents (in this case, the SBO);
3. address;
4. telephone number;
5. e-mail and website address;
6. the date; and
7. the name of the person who prepared the business plan.
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Executive Summary
The executive summary is a portion of the business plan that summarizes the plan and states the objectives of
the business.
1. the capital needs of the business;
2. how the money will be used;
3. what benefits will be derived by the business from the loan or investment; and
4. in case of loan, how it will be repaid with interest, and in the case of outside investment, how profits will
be generated.
Description of the Business
This particular portion of the business plan is very useful to the SBO, as well as prospective investors and
lenders.
1. a short explanation of the industry; and
2. a description of the business.
Statements about the following will be useful in describing the business:
1. the industry sector where the business falls into (retail, manufacturing, education, entertainment, and
others);
2. whether the business is new or established;
3. the ownership status of the business (sole proprietorship, partnership, or corporation);
4. information on who the customers are;
5. information on the size of the market; and
6. information on how the product or service is distributed.
Description of the Product or Service
The product or service must be described clearly in the plan. To achieve this, the following must be presented:
1. The important features of the product or service, such as the maintenance-free feature of the product,
or the home delivery service for products ordered through the phone.
2. A detailed description of how the product is used.
3. What makes the product or service different from others available in the market. Examples are the
availability of the product or service 24 hours a day, or the water-based feature of the product insect
repellant.
Some of these positive factors that are worth describing are:
1. superior organization of the business;
2. latest equipment that are currently used by the company;
3. superior location of the company;
4. fair price of the product or service; and
5. superior customer service offered by the company.
Market Strategies
Market strategies refer to what the SBO plans to do to achieve the market objective of the firm. These
strategies are formulated after undertaking market research.
Market strategies consist of the following:
1. definition of the market;
2. determination of the market share;
3. positioning strategy;
4. pricing strategy;
5. distribution strategy; and
6. promotion strategy.
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Definition of the Market.
The objective of market definition is to determine which part of the total potential market will be served by the
firm. To determine the total potential market, the total aggregate sales of the competitors must be presented
(Figure).
SALES
COMPANY A 50,000 units
65,000 units
COMPANY B
COMPANY C 80,000 units
COMPANY D 10,000 units
205,000 units Market for Product X
Determination of the Market Share.
The business plan will be more useful to the reader, especially lenders and investors, if the projected market
share of the firm is presented.
To determine the firm's market share, the following steps may be used:
1. determine the number of prospects in the target market;
2. determine the number of times the product or service is purchased by the target market;
3. figure out the potential annual purchase; and
4. determine the percentage of the potential annual purchase that the firm can attain (Table).
Determining the Firm s Market Share (an example)
Number of prospects in the target market 1,000 families
Frequency of purchase per year (average) 48 times
Total number of purchases per year 40,000
Average payment per purchase P 1,000
Projected total industry sales per year P 48,000,000
Percentage the firm can attain 15%
THE FIRM S MARKET SHARE P 7,200,000
Positioning Strategy.
Positioning refers to how the firm differentiates its product or service from those of the competitors and serving
a niche. Positioning strategy is one where the firm identifies a target market segment and develops a strategy
mix to address the desires of that segment. The objective of positioning is to establish the firm's product or
service identity in the mind of the buyer.
Before adapting a positioning strategy, the following questions must first be considered:
1. What does the customer really want to buy from the firm? Apart from product quality, the answer could
vary from fast and efficient service to clean and friendly environment, to good reputation, and the like.
2. How is the product or service different from the competitors'? A product or service may be different
from competition in terms of quality, maintenance requirements, number of uses, ease of operation,
among others.
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3. What makes the product or service unique? The firm's product or service may be unique in many ways. It
may only be the one that is delivered free to the customer's house, or it may be the only product that
provides a trade-in option to the customer.
Pricing Strategy.
How the firm prices its product or service is a very important component of the business plan. If the firm wants
to achieve its objectives, the right price for its product or service must be maintained. In determining the right
price, the following factors must be considered:
1. customer's perception of value in the firm's kind of business;
2. costs involved such as, overhead, storage, financing, production, and distribution; and
3. profit objectives of the firm.
The firm's price may be established through any of the following methods:
1. Cost plus pricing - covers all costs, variable and fixed, plus an extra increment to deliver profit.
2. Demand pricing - is a method of pricing where the firm sets prices based on buyer desires. The range
acceptable to the target market is determined.
3. Competitive pricing - calls for price-setting on the basis of prices charged by competitors.
4. Markup pricing - is a form of cost-oriented pricing in which the firm sets prices by adding per-unit
merchandise costs, operating expenses and de-sired profit.
Distribution Strategy.
Distribution refers to the process of moving goods and ser-vices from the firm to the buyers. The distribution
channel that will be adapted must provide a strategic advantage to the firm.
Common distribution channels are the following:
1. Direct sales - is the most effective channel if the plant is to move goods directly to the ultimate users.
2. Original equipment manufacturer sales - involves selling a manufactured product to another
manufacturer who, in turn, incorporates the same to his product and which is later sold as a finished
product to the end user. An example is the sound system incorporated into cars.
3. Manufacturer's representatives - are wholesalers employed by one or several producers and paid on
commission according to quantity sold.
4. Wholesalers - are channel members that sell to retailers or other agents for further distribution through
the channel until they reach the final users.
5. Brokers - are distributors who buy directly from distributors or wholesalers and sell to retailers or end
users.
6. Retailers - sell directly to consumers.
7. Direct mails - are printed materials used in a targeted campaign to consumers. These are sent directly to
consumers. These include catalogs, letters, e-mail, and other direct appeals (Figure).
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1. DIRECT SALES CHANNEL 2. ORIGINAL EQUIPMENT MANUFACTURER 3. MANUFACTURER S
SALES CHANNEL REPRESENTATIVE
CHANNEL
PRODUCER
ORIGINAL
EQUIPMENT MANUFACTURER
MANUFACTURER
ULTIMATE
USER REPRESENTATIVE
FINAL PRODUCT
4. WHOLESALER MANUFACTURER
CHANNEL
WHOLESALER
MANUFACTURER / RETAILER /
END USER
END USER
5. BROKER CHANNEL
WHOLESALER 6. RETAILER CHANNEL
DISTRIBUTOR /
WHOLESALER RETAILER
RETAILER
BROKER
CONSUMER
END USER
RETAILER / 7. DIRECT MAIL CHANNEL
END USER
COMPANY
CONSUMER
Promotion Strategy
How the company's products or services will be promoted is an important com-ponent of the marketing strategy.
The promotion strategy must include the following:
1. Advertising aspects:
a. advertising budget;
b. positioning message; and
c. first year's media schedule.
2. Packaging ̶ describes how the company's products will be packaged.
3. Public relations ̶ will be a detailed presentation of the publicity strategy of the firm. This will include a
list of media that will be tapped to convey the firm's message to the target market. The schedule of
special events like product launching will also be included.
4. Sales promotions ̶ are means used to support the sales message like special sales, coupons, contests,
premium awards, trade-in, among others.
5. Personal sales ̶ present the sales strategy including:
a. pricing procedures;
b. rules on returns and adjustments;
c. methods of sales presentations;
d. generation of leads;
e. policies on customer services;
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f. compensation of salesmen; and
g. responsibilities of the salesmen.
Analysis of the Competition
The small business operator (or the entrepreneur) will find it difficult to compete if his competitors are unknown
to him. This makes it necessary to make an analysis of the competitors.
In competitive analysis, the following must be determined:
1. strengths and weaknesses of the firm's competitors;
2. strategies that will give the firm a competitive advantage;
3. barriers that can be developed to prevent competitors or would-be competitors from exploiting the firm's
market; and
4. any opportunity that can be exploited.
Operations and Management
How the firm will be operated on a continuing basis is an important component of the business plan. As such,
the plan must contain the following:
1. organizational structure;
2. operating expenses;
3. capital requirements; and
4. cost of goods sold.
Organizational Structure
A well-defined and realistic organizational structure is an important element of the business plan. Investors and
lending institutions will be interested to look at this particular aspect.
1. marketing (including sales, customer relations and service);
2. production (including quality assurance);
3. research and development;
4. management; and
5. human resources.
Operating Expenses
Projections of operating expenses are important aspects in the preparation of a business plan. This is a
prerequisite in projecting financial statements. Lenders and investors are especially interested in scrutinizing
such statements.
1. rent;
2. advertising and sales promotion;
3. supplies;
4. utilities;
5. packaging and shipping;
6. maintenance and repair;
7. equipment leases;
8. payroll;
9. payroll taxes and benefits;
10. bad debts;
11. professional services;
12. insurance;
13. loan payments;
14. depreciation; and
15. travel.
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Capital Requirements
Capital equipment are necessary items in operating businesses. The business plan will not be complete unless a
listing of capital equipment needed to be purchased is drawn up.
Cost of Goods Sold
Businesses which carry inventories like those engaged in manufacturing and trading must provide a list showing
cost of goods. The cost of goods of trading firms consist of products purchased for resale, while the cost of
goods of manufacturing firms refer to total expenses incurred in manufacturing the products that are intended
to be sold.
These expenses include the following:
1. material;
2. labor; and
3. overhead.
Financial Data
Financiers are most interested in the financial aspects of the business plan. To satisfy this requirement, the
following statements must be presented in the business plan:
1. income statement;
2. balance sheet; and
3. cash flow statement.
Income Statement
The income statement shows the income, expenses, and profits of a firm over a period of time. It is also
alternatively called "statement of earnings." It may cover a certain year, quarter, or month. It provides basic data
to help the prospective financier analyze the reasons for the projected profits.
Balance Sheet
The balance sheet is a type of financial statement that shows the financial condition of the business as of a
given date. The information provided by this statement is useful not only to the entrepreneur but also to the
prospective creditors. A scrutiny of the balance sheet will give the owner some clues if modifications are needed
in some of the items listed.
1. assets;
2. liabilities; and
3. owner's equity.
The Assets. The assets portion of the balance sheet lists the assets of the firm in order of liquidity.
1. Current assets
a. Cash - which includes cash in checking, savings, and short-term investment accounts;
b. Accounts receivable - refer to income derived from credit accounts; and
c. Inventory - refers to the inventory of materials used to manufacture a product not yet sold.
2. Fixed assets - these are durable assets and will last more than one year. These consist of the following:
a. Capital and plant - refers to the book value of all capital equipment and others such as land and
building, if owned by the firm, less depreciation; and
b. Investments - are investment accounts owned by the company that can-not be converted to cash
in less than a year.
The Liabilities. The liabilities portion of the balance sheet is classified as current or long-term.
Current liabilities are due in one year or less and they include the following:
1. Accounts payable - refer to all expenses incurred by the business that are purchased on an open
account from suppliers and are due for payment;
2. Accrued liabilities - refer to operational expenses that are not yet paid. Examples are overhead and
salaries; and
3. Taxes that are due and payable.
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Long term liabilities are due in more than one year. They include the following:
1. Bonds payable - are bonds due and payable over one year;
2. Mortgage payable - refers to loans used for the purchase of real estate and is repaid for a period of over
one year; and
3. Notes payable - are loans represented by a written document which is pay-able for a period of over one
year.
The Owner's Equity.
This section refers to how much the owner has in the business. It provides a useful means in evaluating the
company. Figure 19 is an illustration of the projected balance sheet.
Cash Flow Statement
The cash flow statement is also a very useful tool for business planners. It pro-jects what the business plan
means in terms of pesos. It is used for operational planning and estimates the amount of cash inflows and
outflows of the business during a specified period of time. A proper balance between the cash inflows and
outflows will result to profits. Figure 20 illustrates a sample of cash flow statement.
The following items are listed in a cash flow statement:
1. Cash - is the cash on hand in the firm.
2. Cash sales - are income from sales paid for by cash.
3. Receivables - are income collected from credit sales.
4. Other incomes - are income derived from investments, interest on money loaned to borrowers, and on
cash derived from sale of assets.
5. Total income ̶ is the sum of each cash, cash sales, receivable, and other income.
6. Material or merchandise refers to:
a. raw material used in the manufacture of the product; or
b. the cash outlay for merchandise inventory of trading firms; or
c. the supplies used in the performance of a service.
7. Direct labor ̶ refers to labor required to manufacture a product or perform a service.
8. Overhead ̶ refers to all fixed and variable expenses required in the day-to-day operations of the
business.
9. Marketing expenses ̶ refer to all salaries, commissions, and other direct costs associated with the
marketing and sales departments.
10. R and D expenses ̶ are labor expenses required to supp development efforts of the firm.
11. G and A expenses ̶ refer to those required to support the general and administrative functions of the
firm.
12. Taxes ̶ refer to all taxes, except payroll withholding taxes, paid to the government, ,national and local.
13. Capital ̶ represents the fund requirements to obtain any equipment needed to generate income.
14. Loan payments ̶ refer to total payments made to reduce or eliminate any long-term debts.
15. Total expenses ̶ refer to the sum of materials, direct labor, overhead, marketing expenses, R and D, G
and A, taxes capital, and loan payments.
16. Cash flow ̶ refers to the difference between total income and total expenses.
17. Cumulative cash flow ̶ refers to the difference between current cash flow and cash flow from the
previous period.
The cash flow must be carefully analyzed and a short summary must be presented in the business plan.
Supporting Documents
The business plan would be more meaningful if supporting documents are included. The documents usually
consist of the following:
1. the owner's resume;
2. contracts with suppliers;
3. contracts with customers or clients;
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4. letters of reference;
5. letters of intent;
6. a copy of the firm's lease;
7. a copy of copyright or patent acquired, if applicable; and
8. tax returns for the past three years.
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